Issue mapping for CDM: An Asian perspective — How to Realize New and Promising Channel?

1. Issue mapping for CDM: An Asian perspective—How to Realize New and Promising Channel? Climate Experts [Advisory Service on Climate Strategy] Chair, Senior Research Fellow IGES Visiting Research Fellow Naoki Matsuo E-mail: n_matsuo@climate-experts.info http://www.climate-experts.info/

2. Climate Mitigation and Sustainable Development • Choosing Less-Energy Economy is the key for Economic Growth • Japan: Good example • Technology transfer needed • Digestion of the technology in the host country needed… • Climate mitigation = Opportunity; NOT cost… • How to design the measures to make portfolio of other policy objectives • Maximizing “co-benefits” • Energy cost reduction • Local environment protection • Local employment • Energy security • …

3. Developing Countries’ Concern… • Unfairness… • Big gap in per capita emissions. • Impact of climate change (vulnerability). • Historical contribution to global warming… • Larger than current emission gap • Emission limit to non-Annex I also? • Against “Opt-In” provision at Kyoto negotiation. • Concern on run out of low-hanging fruit (low-cost mitigation options) • Attitude of developed countries… • Bush Administration • Negotiation tactics as “G77+China”… • How to invite more technology and money… Formalistic/strategic behavior dominates…  What is needed in the real world? Proven experiences! [Example] East Germany experience  Positive attitude of EITs USIJI experience  Positive attitude of Latin America

4. CDM in the Negotiations • “JI” concept in the UNFCCC • AIJ “Pilot” Phase introduced at COP 1 (too early for introduction) • JI revised in the Kyoto negotiations • Proposed by developed countries (e.g., US proposal) • Opposed by developing countries • “CDF” concept in the Brazilian proposal • CDF: Penalty for non-compliance  Fund for mitigation projects • Converted to CDM (with acrobatic interpretation) • Saved Kyoto negotiations • What is CDM? • Almost same as JI concept in the US proposal… • Key point: Proposal from non-Annex I • Bridge between South and North…

5. Two Objectives for CDM • Environmental corporation • To assist host developing country to achieve sustainable development • No uniform judgement criteria(under jurisdiction of the host government) • Local environment, employment, … • New tool to comply with the target (investor) • Offset domestic excess emissions by the GHG “reductions” in the developing country • Business tool for private sector • Incentives / driving force

6. Institutions for CDM • COP/MOP (Conference of the Parties/Meeting of the Parties) • Ultimate decision-making body for the Kyoto Protocol • Designation of the Operational Entities • COP as COP/MOP until the entry into force of the KP • CDM Executive Board (CDM EB) • Supervising body of the CDM. Supported by the Secretariat • Decides the detailed rules/modalities of the CDM. Recommendation to the COP/MOP • Registration of the projects; Accreditation of the OE; Approval of the baseline methodologies, etc.; Issuance of the CERs; Operation of the CDM Registry; … • Panels • Recommendation of the detailed rules/modalities to the CDM EB • OE Accreditation; Small-scale CDM; Baseline/monitoring methodologies • Operational Entity • Validation of the project as CDM (ex-ante) • Verification/certification of emissions reductions (ex-post)

7. CDM To Date • Introduction of CDM to Kyoto Protocol as the “Bridge” between South and North 1997 • Marrakech Accords + CDM Executive Board establishment 2001 • Detailed rule preparation [with 3 Panels] 2002–03 • Accreditation of the Operational Entity (validator/verifier) • 20 entities proposed (2: non-Annex I). 1st OE to be accredited at next EB • Small scale CDM • Definition, Indicative list of methodologies, Simplified procedures • Baseline and Monitoring Methodologies • PDD template (version 01; ver.02 to be used after next EB?) • Approval process started 2003 • New methodology approval • 35 methodologies submitted (including duplication) • 9 methodologies approved; 4 reformatted (for validation) • First CDM project will be registered at EB 14… • Methodologies approval process: every 2 months • http://cdm.unfccc.int/methodologies/process/

8. Role of CDM • New Channel • Mutual understanding between South and North • Opportunity to realize benefits by emission reductions • Transfer of technology and money • New emerging market of GHG emission reductions • New business opportunities and compliance tool for Annex I • Also new businesses for non-Annex I companies (emerging interest) • Issues remain…

9. Issue Mapping • PDD – Additionality/Baseline and Methodology • How to make the project as CDM? • DNA – Host country institution • How to invite foreign investment? • Domestic incentives – Investing country • Utilization of CER in domestic emissions trading scheme? • Project selection • What types of project are promising? • Financing the project – Carbon financing • Still unknown in the financial sector • Sustainability – Public money utilization • Small-scale, community-based, … • Needs-Seeds matching – How to find the project? • Institutional framework

10. Compliance Tool Sold in the Market CDM Project Cycle and Associated Risks Project Design      Designing the “additional” project? PDD Drafting      Find out capable consultant? New Methodology Approval      Approved without delay? CDM EB •     Registered as CDM without delay? (incl. host/investor country’s approval) Validation OE Project Implementation      Planned performance? Without delay? Monitoring      Is monitoring good enough? Verification/Certification OE CERs Issuance      Planned amount of CERs issued? CDM EB      Market price hover around?

11. CDM Project-Cycle – Validation PDD Drafting (with New Methodology) Submit to CDM EB through OE (technical) clarification Expert desk review + Public comments Pre-recommendation Meth Panel recommendation Judgement by CDM EB A-rated: Approved B: Resubmit to Meth Panel C: Not approved Reformat to AM 00xx Validation by OE If existing methodology applicable Host country approval, local stakeholder/NGO/public comments Request for registration by OE (w/ validation report) Assessment by CDM EB (w/ host countries) Registration as CDM project by CDM EB

12. PDD and Methodology • New Methodologies in Annexes 3 (baseline) and 4 (monitoring) of the Project Design Document • Not easy task… • Submission: 1st round: 14, 2nd: 2, 3rd: 5, 4th: 14, 5th: 7,… • Only 2 approved in the 1st and 2nd round (9 +3 approved to date) • Submitted new methodology: 48 to date • Approved ones provide good examples • Once failed, around a half year delayed… • Problems • Many skills needed… • What is “methodology”? How to describe methodology? • What is “additionality”? How to demonstrate additionality? • What is “baseline”? How to identify baseline scenario?

13. Methodology, Additionality and Baseline • Methodology • Describe the proper noun by linguistic words • Assume a conceptual/virtual generalized project • Additionality • The same project would not be implemented if the project is not registered as CDM project • Demonstrate why it is not “anyway” project • Baseline scenario • What would have occurred if CER revenue = 0 ? • Several possible scenarios are assessed… • Local regulation, investment analysis, several barriers, … • Demonstrate logical and reasonable conclusion • Express as a mathematical formula/algorithm • How to describe the additionality/baseline as methodology?

14. Concept of Baseline Reductions even without the project If Current Situation Continues… (BaU) Baseline emissions (counter-factual) True emission reductions If local regulation is introduced… Project emissions time

15. Decomposing Baseline Setting… • Baseline Methodology [Meth Panel/CDM EB] • Baseline “Scenario” identification • “Additionality test” is included • “Applicability conditions” are set • Represent such a scenario by using “mathematical formula” • Baseline Emissions: BEy = f(pi) • The associated parameters pi are those of ‘project’ scenario to be monitored [linked to the monitoring methodology] • Application of the Baseline Methodology [OE/CDM EB] • Specific to the proposed project • “Evidences” whether the methodology can be applicable are needed

16. Difference between Baseline Scenarios

17. Approved Methodologies (reformatted) • AM0001 • Incineration of HFC 23 Waste Streams • AM0002 • Greenhouse Gas Emission Reductions through Landfill Gas Capture and Flaring where the Baseline is established by a Public Concession Contract • AM0003 • Simplified financial analysis for landfill gas capture projects • AM0004 • Grid-connected biomass power generation that avoids uncontrolled burning of biomass

18. HFC 23 Waste Stream Now released to atmosphere • HFC 23: Inevitably generated by-product of HCFC 22 production process [non-toxic substance] • Most of HFC 23 is released without recovery [small portion: sold] • High GWP: 11,700 (equivalent to 11,700 times of CO2 in mass unit)

19. Project Outline

20. GHG Emission Sources

21. Accounting of Emission Reductions ERy = BEy − PEy PEy = PEy[in] + PEy[out] = ND_HFC23y(Not Destroyed HFC 23) + CO2_HFC23y (HFC combustion) + CO2_NGy (Natural Gas combustion) + CO2_Powery (Power supply) + CO2_Steamy (Steam supply) BEy = [[ q_HFC23y Purity_HFC23y ]  B_HFC23y] GWP_HFC23 HFC 23 input to the incinerator HFC 23 to be limited due to local regulation (= 0) Cut-Off Condition: Q_HFC23yQ_HCHC22yw (ratio of latest 3 years) (to exclude the case of manipulating of HCFC 22 production process to get more HFC 23)

22. Monitoring Parameters Environmental pollutants are also monitored

23. Project Validation and Registration • Operational Entity to judge whether the Project is validated as a CDM project • Validation check points • CDM participation requirements(incl. host country’s approval/confirmation document to assist its SD) • Stakeholders’ comments and the responses • Environment impact assessment • Baseline setting (with “approved” methodology and “anticipated” value)Whether the methodology is applied appropriately? • Evidences needed… • Monitoring Plan and methodology (incl. baseline emissions) • Operational Entity opens the PDD etc for public and invites public comments.The OE makes Validation Report available for public and requests it to register. • Registration by the Executive Board • Within 8 weeks after request by the OE • If review requested, the EB should decide within following 2nd meeting • Request by the EB member (more than 3) or the Party concerned

24. Small Scale CDM • Definition (mutually exclusive by component; ceiling for creditation) • <15 MW renewables (RE: indicative list; 15 MW: catalog capacity; MW: MW(e)) • <15 GWh/yr EE (EE: list; activity down: no; BaU minus project) • <15 kt-CO2e/yr (threshold: Project emissions; list) • Bundling/unbundling • Bundling: OK; Debundling: no • Baseline • Regular revision • Benchmarking (multi-project) methodologies: given in advance • Simplification in procedures (also for monitoring) • Share of Proceeds: lower (LDC: zero) • Project Cycle; Crediting Period • Same as others • OE • OEs for Validation and verification/certification can be the same • Local OE: desirable • Simplification • In each procedures (not skipping some procedures)

25. CDM Project CER Generating CERs CDM Registry Pending a/c To the participants’ a/c JI Project ERU Host country converts AAU or RMU to ERUs To the participants’ a/c Transfer of GHG Units Annex I initial allocation + Sink AAU Base year GHGs x Annex B x 5 years RMU Additional absorption Each Party issues to Its holding a/c Distribution to firms… ERU AAU RMU CER Emissions Trading RMU CER AAU ERU

26. Can non-Annex I sell CERs? • Non-Annex I can hold CERs in its account in the CDM Registry [Government and entities] • However, it is uncertain whether such CERs can be transferred… • Not prohibited, but not allowed… • Emissions trading is for Annex B countries (only?) • Eligibility to participate in Kyoto mechanisms is set for Annex I countries only • At least some country (e.g., Japan) does not allow… • Risky for non-Annex I entities to hold CERs… • Instead, they can get monetary profits or ask Annex I partner(s) to do so on behalf; • Or, set up an account in Annex I.

27. GHG Market Perspectives • Market value of CERs… • Once issued, all CERs (except for sink-related CERs) have the same value • Currently, CER value depends on… • Methodology status • Approved or expected to be approved or …? • Possibility of success of the project • (Proven) experience of the project participants • Technology • CDM [methodology, validation, …] • Name value in the GHG/CER market • Possibility of unexpected failure • Host country’s policy — Country risks • Ordinary FDI policy • CDM policy • Good collaboration between hosts and investors is must • Companies and governments

28. GHG Market Development • Voluntary reductions market • Emission (reductions) market under authorized institution 2005: next milestone…

29. Host Country’s Institution • Designated National Authority (DNA) • How to establish/maintain the DNA? • How to reduce bureaucracy and enhance efficient decision-making? • How to call domestic entities’ attention to this new business • Latin-American countries’ experiences • Risks associated with host country’s CDM policy is crucial to invite CDM projects • e.g., many projects proposed in Latin American countries which already established their CDM policy and DNA • AIJ experiences are important • Clear process and criteria for approval process and supporting scheme

30. Domestic Incentives in Annex I • Clear incentives needed… • e.g., domestic emissions trading scheme • Government’s procurement • Carbon funds • Other supports • Information, negotiation, … • Responding to the uncertainties • e.g., independence of the KP entry into force • Anyway, CER is fungible in the EU-wide emissions trading scheme • Existing of the market

31. Project Selection and Financing • Design non-CO2 gases reductions and/or renewables • High GWP gases enhance the profitability of CDM project • e.g., Landfill CH4, HFC decomposition, CH4 in biomass residue, … • Design other values than GHG reductions • Maximizing co-benefits • Underlying project + CDM part (additional reductions) • Underlying project: OK for profitable or ODA project • Utilization of higher technology • Risk reduction • How to finance underlying part? • Financial sector people have not known carbon-related value yet… CDM Part (additional) Underlying Project

32. How to Utilize Public Money in CDM • Public funding for CDM projects is not to result in the diversion of ODA… • ODA utilization and Sustainability judged by the host country • Consultation between host/investors needed on needs/possibilities • Financing the project by ODA • Underlying part by ODA + additional reduction part (CDM part) by others • Screening the on-going/planned ODA projects and assess the possibility for additional GHG reductions • Sustainability-oriented project implementation and support (by packaging with other project) • Example: PV project in small island states • Redress the regional imbalance of CDM projects • Private participants focus on profitable geographical region • Supporting smooth implementation of CDM projects • Capacity building • Information clearinghouse role to match needs and seeds, etc…

33. Matching Needs and Seeds • Status-Quo • Ad-Hoc based needs-seeds matching • How to invite needs? • Capacity building • private sector, (central/local) gov’t officials, NGOs,… • Institutional • DNA and others(?) • How to invite seeds? • From Annex I • (ir)regular business forum in Annex I • From non-Annex I • financial sector, private sectors, • Role of Information Clearinghouse Needed… • Internet-based institution • Other channels… • Who plays? • Host (central/local) government, Investor government, MDB, Private sector, …